India’s silver market is witnessing an unusual and potentially destabilising phase where policy expectations, rather than physical demand alone, are driving prices sharply away from global parity.

Over the past several months, silver prices have rallied strongly, tracking global strength in precious metals and rising domestic interest. But the current surge in domestic prices is no longer being explained purely by demand or global cues. Instead, market participants are increasingly pointing to speculation around a possible hike in import duty in the forthcoming Union Budget as the key factor distorting prices.

This has created an uncommon situation where silver futures on the Multi Commodity Exchange (MCX) are trading at a significant premium to the metal’s landed cost in India.

The backdrop to this distortion lies in the sharp spike in imports. According to recent data, silver imports in December alone surged 79.7 percent month on month to $0.76 billion. For the April to December period, imports jumped nearly 129 percent year on year to $7.77 billion, compared to $3.39 billion in the same period last year. This rise has occurred even after the festive season, a period when imports typically peak.

In the previous Union Budget, the government had reduced the import duty on silver to 6 percent from 12 percent. The move was aimed at curbing smuggling and making legal imports more attractive for domestic buyers. With an additional 3 percent GST, these levies determine silver’s landed price in India.

However, the lower duty, combined with rising demand, has significantly expanded the import bill. This has led to widespread market expectations that the government may reverse course and increase the customs duty to rein in imports.

These expectations are now directly feeding into market pricing.

Bhavik Patel of Tradebulls Securities indicated that, given the current market dynamics, an increase in import duty cannot be ruled out. As a result, bullion dealers have started charging premiums over prevailing prices in anticipation of a hike.

Adding to the narrative, Nitin Kedia, National General Secretary of the All India Jewellers & Goldsmith Foundation (AIJGF), suggested that market rumours range from a modest 3–4 percent hike to a potential jump to 15 percent.

This speculation has translated into a sharp dislocation in the derivatives market. On January 21, silver futures on MCX were trading at a premium of over Rs 40,000 per kilogram compared to the landed cost. The premium has since remained elevated, with MCX silver futures touching a fresh record high of Rs 3,39,927 per kilogram.

AIJGF has now formally written to the Finance Ministry, raising concerns about possible price manipulation and even potential leakage of price-sensitive policy information. In its letter, the federation noted that such an extraordinary premium cannot be explained purely by rumours unless the market believes the information has some credibility.

The federation has also approached SEBI, requesting the regulator to investigate the abnormal movement in prices. As of now, there has been no response from the regulator.

For jewellers and bullion traders, the issue is not theoretical. The pricing distortion is directly affecting working capital.

Typically, jewellers holding physical silver inventory hedge their exposure by selling futures on the exchange. But when futures trade at such a steep premium, hedging becomes expensive and inefficient. Kedia pointed out that with silver prices having already tripled in the past seven to eight months, the additional premium creates severe stress on liquidity for market participants.

The industry has also flagged the risk of duty arbitrage if the customs duty is raised sharply to levels like 15 percent. Such a move could once again incentivise unofficial channels, reversing the original intent behind last year’s duty cut.

Interestingly, industry voices suggest that while silver duty may be reconsidered, a similar move in gold appears unlikely. Instead, the government may focus on promoting domestic gold refining rather than altering customs duty, as frequent changes make gold less accessible for consumers.

The larger issue here is how policy expectations are now becoming a pricing variable in commodity markets, well before any official announcement.

For markets, this raises two important questions: whether the Budget will validate current price expectations,